Paul Trott INNOVATION MANAGEMENT AND NEW PRODUCT DEVELOPMENT Sixth Edition Innovation Management and New Product Development Innovation Management and New Product Development Sixth Edition Paul Trott Portsmouth Business School Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • Sao Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First published 1998 (print) Second edition published 2002 (print) Third edition published 2005 (print) Fourth edition published 2008 (print) Fifth edition published 2012 (print) Sixth edition published 2017 (print and electronic) © Pearson Professional Limited 1998 © Pearson Education 2002, 2005, 2008, 2012, 2017 The right of Paul Trott to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. 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ISBN: 978-1-292-13342-3 (print) 978-1-292-16540-0 (PDF) 978-1-292-17069-5 (ePub) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for the print edition is available from the Library of Congress 10 9 8 7 6 5 4 3 2 1 20 19 18 17 16 Cover image: Max Margarit/Shutterstock Print edition typeset in 10/12pt Sabon LT Pro by iEnergizer Aptara® Ltd Print edition printed and bound in Slovakia by Neografia NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION Contents Preface Acknowledgements Plan of the book 1 xix xxiii xxix Part One Innovation management 1 Innovation management: an introduction 2 The importance of innovation The study of innovation Two traditions of innovation studies: Europe and the USA Recent and contemporary studies The need to view innovation in an organisational context Individuals in the innovation process Problems of definition and vocabulary Entrepreneurship Design Innovation and invention Successful and unsuccessful innovations Different types of innovation Technology and science Popular views of innovation Models of innovation Serendipity Linear models Simultaneous coupling model Architectural innovation Interactive model Innovation life cycle and dominant designs Open innovation and the need to share and exchange knowledge (network models) Doing, using and interacting (DUI) mode of innovation Discontinuous innovation – step changes Innovation as a management process A framework for the management of innovation New skills Innovation and new product development 4 7 9 10 11 12 12 13 13 15 16 17 18 20 21 21 22 23 24 24 25 Case study: Has the Apple innovation machine stalled? 35 26 27 28 30 30 33 34 v Contents 2 3 vi Chapter summary Discussion questions Key words and phrases References Further reading 41 42 42 42 46 National systems of innovation and entrepreneurship 48 Innovation in its wider context The role of the state and national ‘systems’ of innovation Why firms depend on the state for so much How national states can facilitate innovation National scientific capacity and R&D offshoring The impact of the economic crisis on innovation Fostering innovation in the United States and Japan Triple Helix of university–industry–government relationships that drives innovation The right business environment is key to innovation Waves of innovation and growth: historical overview Fostering innovation in ‘late-industrialising’ countries Innovation within the 28 European Union states Improving the innovation performance of the EU Entrepreneurship Entrepreneurship and innovation Defining entrepreneurship Technological entrepreneurship: a question of context Science and technology policy Small and medium-sized enterprise Innovation policy Entrepreneurship policy 50 52 52 53 56 56 56 Case study: Pizza delivery with unmanned drones 76 Chapter summary Discussion questions Key words and phrases Websites worth visiting References Further reading 81 81 82 82 82 85 Market adoption and technology diffusion 86 Time lag between innovation and useable product Innovation and the market Innovation and market vision Analysing internet search data to help adoption and forecasting sales Innovative new products and consumption patterns 88 88 89 57 59 59 62 63 65 68 69 71 73 74 74 75 76 89 89 Contents 4 Marketing insights to facilitate innovation Lead users Users as innovators in the virtual world Crowdsourcing for new product ideas Frugal innovation and ideas from everywhere Innovation diffusion theories Beacon products Seasonality in innovation diffusion The Bass Diffusion Model Adopting new products and embracing change Market adoption theories 91 93 95 95 97 98 100 102 102 102 104 Case study: How three students built a business that could affect world trade 104 Chapter summary Discussion questions Key words and phrases References Further reading 110 111 111 111 113 Managing innovation within firms 116 Organisations and innovation The dilemma of innovation management Innovation dilemma in low technology sectors Dynamic capabilities Managing uncertainty Pearson’s uncertainty map Applying the uncertainty map in practice Managing innovation projects Organisational characteristics that facilitate the innovation process Growth orientation Organisational heritage and innovation experience Vigilance and external links Commitment to technology and R&D intensity Acceptance of risks Cross-functional cooperation and coordination within organisational structure Receptivity Space for creativity Strategy towards innovation Diverse range of skills Industrial firms are different: a classification Organisational structures and innovation Formalisation Complexity Centralisation Organisational size The role of the individual in the innovation process IT systems and their impact on innovation 118 118 119 120 120 121 123 124 126 129 130 130 130 131 131 131 131 132 132 133 135 136 136 137 137 137 138 vii Contents 5 6 viii Management tools for innovation Innovation management tools and techniques Applying the tools and guidelines Innovation audit 141 141 144 144 Case study: Gore-Tex® and W.L. Gore & Associates: an innovative company and a contemporary culture 145 Chapter summary Discussion questions Key words and phrases References Further reading 149 150 150 150 153 Operations and process innovation 154 Operations management The nature of design and innovation in the context of operations Design requirements Design and volumes Craft-based products Design simplification Reverse engineering Process design Process design and innovation The relationship between product and process innovation Managing the manufacturing: R&D interface in process industries Stretch: how innovation continues once investment is made Innovation in the management of the operations process Triggers for innovation Design of the organisation and its suppliers: supply chain management Business process re-engineering (BPR) Lean innovation 156 157 158 160 162 163 163 164 166 168 168 168 169 170 175 178 179 Case study: Innovation on the production line 180 Chapter summary Discussion questions Key words and phrases References Further reading 184 184 185 185 186 Managing intellectual property 188 Intellectual property Trade secrets An introduction to patents Novelty Inventive step Industrial applications 190 193 193 195 195 195 Contents 7 Exclusions from patents The patenting of life The configuration of a patent Patent harmonisation: first to file and first to invent Some famous patent cases Patents in practice Expiry of a patent and patent extensions Patent extensions The use of patents in innovation management Patent trolls Do patents hinder or encourage innovation? Alternatives to patenting Trademarks Satisfy the requirements of section 1(1) Be distinctive Not be deceptive Not cause confusion Brand names Using brands to protect intellectual property Exploiting new opportunities Brands, trademarks and the internet Duration of registration, infringement and passing off Registered designs Copyright Remedy against infringement Damages Injunction Accounts Counterfeit goods and IP 196 196 198 198 199 200 201 202 203 203 204 205 207 208 209 209 210 210 210 211 212 212 213 214 216 216 216 216 216 Case study: Pricing, patents and profits in the pharmaceutical industry 218 Chapter summary Discussion questions Key words and phrases References Further reading 221 222 222 222 224 Part Two Turning technology into business 225 Managing organisational knowledge 226 The Battle of Trafalgar Technology trajectories The acquisition of firm-specific knowledge The resource-based perspective Dynamic competence-based theory of the firm Developing firm-specific competencies 228 229 230 230 231 233 ix Contents 8 x Competencies and profits Technology development and effort required The knowledge base of an organisation The whole can be more than the sum of the parts Organisational heritage When the performance of the organisation is greater than the abilities of individuals Characterising the knowledge base of the organisation The learning organisation Innovation, competition and further innovation Dominant design How firms cope with radical and incremental innovation Developing innovation strategies Leader/offensive Fast follower/defensive Cost minimisation/imitative Market segmentation specialist/traditional A technology strategy provides a link between innovation strategy and business strategy 234 235 236 237 237 Case study: The cork industry, the wine industry and the need for closure 251 Chapter summary Discussion questions Key words and phrases References Further reading 260 260 260 261 262 Strategic alliances and networks 264 Defining strategic alliances The fall of the go-it-alone strategy and the rise of the octopus strategy Complementary capabilities and embedded technologies Interfirm knowledge-sharing routines Forms of strategic alliance Licensing Supplier relations Outsourcing Joint venture Collaboration (non-joint ventures) R&D consortia Industry clusters Low technology industry rely on networks for innovation Innovation networks The ‘virtual company’ Motives for establishing an alliance The process of forming a successful strategic alliance Negotiating a licensing deal Terms for the agreement 266 268 269 270 271 271 272 272 273 273 273 274 275 275 278 279 279 280 281 238 239 241 242 244 244 248 249 250 250 250 251 Contents 9 Rights granted Licence restrictions Improvements Consideration (monetary value) Reports and auditing of accounts Representations/warranties Infringement Confidentiality Arbitration Termination Risks and limitations with strategic alliances The role of trust in strategic alliances The concept of trust Innovation risks in strategic outsourcing Eating you alive from the toes up The use of game theory to analyse strategic alliances Game theory and the prisoner’s dilemma Use of alliances in implementing technology strategy 281 281 281 281 282 282 282 282 282 282 283 284 285 286 289 289 290 292 Case study: And the winner is Sony’s Blu-ray – the high-definition DVD format war 292 Chapter summary Discussion questions Key words and phrases References Further reading 299 299 299 300 302 Management of research and development 304 What is research and development? The traditional view of R&D R&D management and the industrial context R&D investment and company success Classifying R&D The operations that make up R&D R&D management and its link with business strategy Integration of R&D Strategic pressures on R&D The technology portfolio The difficulty of managing capital-intensive production plants in a dynamic environment Which business to support and how? Technology leverage and R&D strategies Strengths and limitations of this approach Allocation of funds to R&D Setting the R&D budget Level of R&D expenditure 306 307 307 310 313 315 317 318 319 320 Case study: The long and difficult 13-year journey to the marketplace for Pfizer’s Viagra 322 322 324 326 326 327 329 330 xi Contents Chapter summary Discussion questions Key words and phrases References Further reading 10 Managing R&D projects 342 Successful technology management The changing nature of R&D management Organising industrial R&D The acquisition of external technology Level of control of technology required Forms of external R&D Effective R&D management Managing scientific freedom Skunk works Technology roadmapping The link with the product innovation process The effect of R&D investment on products Evaluating R&D projects Evaluation criteria 344 346 349 350 351 352 355 355 359 360 360 362 363 363 Case study: CSI and genetic fingerprinting 368 Chapter summary Discussion questions Key words and phrases References Further reading 374 374 375 375 376 11 Open innovation and technology transfer Background The dominant economic perspective Open innovation The paradox of openness Introduction to technology transfer Information transfer and knowledge transfer Models of technology transfer Licensing Science park model Intermediary agency model Directory model Knowledge Transfer Partnership model Ferret model Hiring skilled employees Technology transfer units Research clubs xii 337 337 338 338 339 378 380 381 382 384 384 385 386 386 387 388 388 388 388 390 390 390 Contents European Space Agency (ESA) Consultancy Limitations and barriers to technology transfer NIH syndrome Absorptive capacity: developing a receptive environment for technology transfer Linking external technology to internal capabilities Managing the inward transfer of technology Technology transfer and organisational learning 390 391 391 392 393 395 396 397 Case study: How developments in electronic sensors create destruction in the disposable nappy industry 398 Chapter summary Discussion questions Key words and phrases References Further reading 403 403 404 404 406 Part Three New product development 409 12 Business models What is a business model? The business model and the business plan The range of business models The sixteen business model archetypes Revenue models Enterprise models Industry models The parts of the business model The offering The customer side The infrastructure The finances The business model dilemma of technology shifts Considerations in designing a business model Switching costs Scalability Recurring revenues Cashflow Getting others to do the work Protecting the business from competitors Changing the cost structure Intellectual property is an asset The technology licence and business relationships Continual adaptation of the business model The licensing business model Income from licensing 410 413 415 416 417 420 421 422 422 423 423 424 424 426 428 428 428 428 429 429 429 429 430 430 431 431 432 xiii Contents Marketing issues related to the licensing model Financial and strategic implications Costs and benefits of the licensing model Other strategic uses of licensing Case study: Developing a new product for the teeth whitening market 435 Chapter summary Discussion questions Key words and phrases References Further reading 441 442 442 442 443 13 Product and brand strategy 446 Capabilities, networks and platforms Product platforms Product planning Product strategy Competitive strategy Product portfolios The competitive environment Differentiation and positioning Differentiation Product positioning Competing with other products Managing brands Brands and blind product tests Brand strategy Brand extensions Market entry Launch and continuing improvement Withdrawing products Managing mature products 448 449 451 454 454 455 456 457 457 458 460 462 462 464 465 468 470 471 472 Case study: Umbrella wars: GustBuster® and senz° 473 Chapter summary Discussion questions Key words and phrases References Further reading 477 477 478 478 479 14 New product development Innovation management and NPD Product development as a series of decisions New products and prosperity Considerations when developing an NPD strategy Ongoing corporate planning xiv 432 433 433 434 480 482 484 484 485 485 Contents Ongoing market planning Ongoing technology management Opportunity analysis/serendipity NPD as a strategy for growth Market penetration Market development Product development Diversification A range of product development opportunities What is a new product? Defining a new product Classification of new products Repositioning and brand extensions New product development as an industry innovation cycle Overview of NPD theories The fuzzy front end Customer cocreation of new products Time to market Agile NPD Models of new product development Departmental-stage models Activity-stage models and concurrent engineering Cross-functional models (teams) Decision-stage models Conversion-process models Response models Network models 486 486 486 486 487 487 487 488 488 490 492 494 496 497 498 499 501 502 502 503 503 505 505 506 507 507 507 Case study: Launching innocent into the growing fruit smoothie market 508 Chapter summary Discussion questions Key words and phrases References Further reading 516 516 516 517 519 15 New service innovation The growth in services Growth in knowledge-intensive business services (KIBS) Outsourcing and service growth Different types of services Technology and new service development New services and new business models Characteristics of services and how they differ from products Classification of service innovations The new service development process New service development models Sequential service development models or Stage-Gate® models 522 524 524 525 528 530 530 531 532 533 535 535 xv Contents Concurrent service development models Service innovation and the consumer Consumer user toolkits Consumer testing of services 536 538 538 540 Case study: Developing new services at eBay 541 Chapter summary Discussion questions Key words and phrases References Further reading 548 548 548 548 551 16 Market research and its influence on new product development xvi 552 Market research and new product development The purpose of new product testing Testing new products Techniques used in consumer testing of new products Concept tests Test centres Hall tests/mobile shops Product-use tests Trade shows Monadic tests Paired comparisons In-home placement tests Test panels When market research has too much influence Discontinuous new products Market research and discontinuous new products Circumstances when market research may hinder the development of discontinuous new products Technology-intensive products Breaking with convention and winning new markets When it may be correct to ignore your customers Striking the balance between new technology and market research Using suppliers and lead users to improve product variety The challenge for senior management 554 555 556 557 557 558 558 558 558 559 559 559 559 559 562 563 Case study: Dyson, Hoover and the bagless vacuum cleaner 573 Chapter summary Discussion questions Key words and phrases References Further reading 582 582 583 583 584 564 565 566 570 571 572 573 Contents 17 Managing the new product development process 586 New products as projects The Valley of Death The key activities that need to be managed Assembling knowledge The generation of business opportunities Developing product concepts: turning business opportunities into product concepts The screening of business opportunities New technology product blogs Development of product prototypes Technical testing Market testing and consumer research How virtual worlds can help real-world innovations Market introduction NPD across different industries Organisational structures and cross-functional teams Teams and project management Functional structures Matrix structures Corporate venturing Project management Reducing product development times through computer-aided design The marketing/R&D interface High attrition rate of new products 588 589 590 592 593 Case study: An analysis of 3M, the innovation company 612 Chapter summary Discussion questions Key words and phrases References Further reading 617 617 618 618 619 Index 621 594 595 597 597 599 599 600 601 603 603 604 604 605 607 607 608 608 609 xvii This page intentionally left blank Preface The demise of Kodak is a sharp reminder to all firms, even great big ones, that success today does not ensure success tomorrow. The ability of firms to develop new products and services that people want will surely help them survive into the future. But precisely how should firms go about this? The Kodak case is even more remarkable because Kodak was the pioneer in digital cameras – the technology that, ultimately, led to its decline in income. So, in this case, it is not a lack of innovation per se but how it is used to deliver value to the firm and its customers. We are all well aware that good technology can help companies achieve competitive advantage and long-term financial success; just look at Google. But there is an abundance of exciting new technology in the world and it is the transformation of this technology into products that is of particular concern to organisations. There are numerous factors to be considered by the organisation, but what are these factors and how do they affect the process of innovation? This book will explain how and why the majority of the most significant inventions of the past two centuries have not come from flashes of inspiration, but from communal, multilayered endeavour – one idea being built on another until a breakthrough is reached (Johnson, 2010). In this book we see that many of the old traditional approaches to management need to change and new approaches need to be adopted. Increasingly, managers and those who work for them are no longer in the same location. Often, complex management relationships need to be developed because organisations are trying to produce complex products and services and do so across geographic boundaries. Cross-functional and cross-border task forces often need to be created. Objective of the book It is designed to be accessible and readable. The book emphasises the need to view innovation as a management process. We need to recognise that change is at the heart of it. And that change is caused by decisions that people make. The framework in Chapter 1 (Figure 1.9) attempts to capture the iterative nature of the network processes in innovation and represents this in the form of an endless innovation circle with interconnected cycles. This circular concept helps to show how the firm gathers information over time, how it uses technical and societal knowledge, and how it develops an attractive proposition. This is achieved through developing linkages and partnerships with those having the necessary capabilities. xix Preface Target audience This book is written for people who want to understand how firms can improve the way they manage their innovation processes to develop new products and services. It can be used as a textbook for undergraduate or graduate courses in innovation management and new product development. A second audience is the manager who wishes to keep abreast of the most recent developments in the innovation field. Special features The book is designed with one overriding aim: to make this exciting and highly relevant subject as clear to understand as possible. To this end, the book has a number of important features: ● ● ● ● ● ● ● ● ● ● ● ● ● xx A clear and straightforward writing style enhances learning comprehension. Extensive up-to-date references and relevant literature help you find out more and explore concepts in detail. ‘Innovation in action’ boxes illustrate how real companies are managing innovation today. Clear chapter openers set the scene for each chapter and provide a chapter contents list, which offers page references to all the sections within the chapter. Learning objectives at the beginning of each chapter explicitly highlight the key areas that will be explored in the chapter. More photographs and images are included to help illustrate and enliven the text. Topical articles from the Financial Times illustrate how the subject is being discussed in the context of the wider business world. Summaries at the end of each chapter provide a useful means of revising and checking understanding. ‘Pause for thought’ questions are integrated within the text. These are designed to help you reflect on what you have just read and to check your understanding. Answers to all ‘Pause for thought’ questions are given on the book’s website (www.pearsoned.co.uk/trott). Comprehensive diagrams throughout the book illustrate some of the more complex concepts. Plentiful up-to-date examples within the text drive home arguments. This helps to enliven the subject and places it in context. A comprehensive index, including references to all defined terms, enables you to look up a definition within its context. See also the ‘Key words and phrases’ boxes at chapter ends. Key words are presented emboldened in colour within the main text. A substantial case study at the end of each chapter shows the subject in action within actual firms. These have been trialled on classes at several universities and have formed the basis of lively one-hour class seminar discussions. Preface What is new in the 6th edition? ● ● ● ● ● ● ● ● ● ● ● ● Three new chapters: ‘National systems of innovation and entrepreneurship’, ‘Market adoption and technology diffusion’ and ‘Business models’. ‘Innovation in action’ boxes in every chapter. These bring the subject to life by providing a real life illustration of how firms are managing innovation today. All chapters have been reviewed and updated with relevant references to the literature. Illustrations within chapters have been renewed. All case studies have been updated and modified where appropriate. Chapter 1 – there is a new case study on Apple. This new case study examines the increasing competition faced by Apple in the smartphone market and the rise of Samsung. Chapter 2 – this is a new chapter focusing on national systems of innovation and entrepreneurship. It emphasises the role played by the state in helping private firms grow. The subject of entrepreneurship receives substantial coverage by illustrating the linkages between these areas. Chapter 3 – this is a new chapter on market adoption and technology diffusion. The role played by lead users in the innovation process is explored. The chapter also covers the growing use by firms of crowdsourcing for new product ideas. The topic of frugal innovation is also included. Chapter 5 – a major new case study at the end of the chapter tells the story of how an innovation in the paper and board packaging industry may help it compete with polymers. Chapter 7 – a new section examines the issue of disruptive innovation and the innovation dilemma. This looks in detail at how it is possible for firms to offer what appears to be an inferior technology to a particular market segment and how, over time, that product can develop and overtake the original technology in terms of performance. Chapter 11 – a major new case study at the end of the chapter tells the story of how a nappy producer is considering using sensors in its products to indicate wetness. How will consumers react? Chapter 12 – this is a new chapter on business models. The chapter explains the link between business models and strategy and business plans. It discusses the many different forms of business models that exist, including the famous bait and hook business model that has been so effectively used by ink jet cartridge manufacturers and razor producers. Chapter 15 – the case study on eBay has been rewritten to include the eBayPayPal separation. The growth in online payment systems forms a key part of this new case. Chapter 17 – a new section explores the area of innovation audits. This offers some practical guidance to firms wishing to assess their level of innovation capacity or those of others. xxi Preface Web products Log on to www.pearsoned.co.uk/trott to access learning resources, which include: For students: Study materials designed to help you improve your results. ● Self-test multiple choice questions, organised by chapter. ● Answers to all ‘Pause for thought’ questions, to allow you to check understanding as you progress. ● Annotated links for each chapter to relevant companies and internet sites. ● For tutors (password protected): ● Lecture notes and PowerPoint slides. ● Figures and tables from the book in PowerPoint colour slides. ● Key models as full-colour animated PowerPoint slide shows. ● Teaching/learning case studies. ● Answers to all end-of-chapter discussion questions. ● Multiple choice questions, organised by chapter for use in assessments. Reference Johnson, S. (2010) Where Good Ideas Come From: The Natural History of Innovation, Riverhead Books, New Jersey, USA. xxii Acknowledgements Author’s acknowledgements I am indebted to many for their ideas and assistance. My primary thanks go to the many academics who have advanced our knowledge of innovation and new product development and on whose shoulders I have been able to stand. The following reviewers provided feedback for this new edition: Jon Sundbo, Roskilde University, Denmark; Guus Berkhout, TUDelft; Helen Perks, UMIST; Niki Hynes, Napier University Business School; Mark Godson, Sheffield Hallam University; Paul Oakley, University of Birmingham; David Smith, Nottingham Business School, Nottingham Trent University; Fritz Sheimer, FH Furtwagen; Claus J. Varnes, Copenhagen Business School; Roy Woodhead, Oxford Brookes University; Patrick van der Duin, TU Delft, the Netherlands; Dap Hartman, TU Delft, the Netherlands; E J Hultink, TU Delft, The Netherlands; Phil Longhurst, Cranfield University; Zahed Subhan, Drexel University, USA; Christian M. Thurnes, Hochschule Kaiserslautern — University of Applied Sciences, Germany. It has been a pleasure to work with my editor Rachel Gear, who provided encouragement, help and valuable suggestions. The task of writing has been made much easier by the support I have had from many people. First, all my students who have both wittingly and unwittingly provided constant feedback to me on ideas. Also, a big thank you to the team at Pearson Education. Any errors or omissions in the book are entirely mine. Publisher’s acknowledgements We are grateful to the following for permission to reproduce copyright material: Figures Figure 1.3 from Dana Summers, Tribune Media Services, © Dana Summers, all rights reserved, distributed by Tribune Content Agency; Figure 1.9 from Connecting technological capabilities with market needs using a cyclic innovation model, R&D Management, 40(5), pp. 474–90 (Berkhout, A.J., Hartmann, D. and Trott, P. 2010), © John Wiley & Sons Ltd and RADMA; Figure 2.4 from Regional Innovation Scoreboard 2014, Executive Summary, European Commission (2014), © European Union, 1995–2016; Figure 2.5 from Innovation Union Scoreboard 2014, European Commission (2014), © European Union, 1995–2016; Figure 4.2 from ‘Managing innovation: an uncertainty reduction process’, in Managing Innovation (Pearson, A.W. (Henry, J. and Walker, D. eds) 1991), Sage/OU; Figure 4.3 from Architectural innovation: the reconfiguration of existing product technologies and the failure of established firms, Administrative Science Quarterly, 35(1), pp. 9–30 (Henderson, R. and Clark, K. 1990), © 1990 Johnson Graduate School of Management, Cornell xxiii Acknowledgements University, Sage Publications; Figure 4.5 from Relationships between innovation stimulus, innovation capacity and innovation performance, R&D Management, 36(5), pp. 499 –515 (Prajogo, D.I. and Ahmed, P.K. 2006), © John Wiley & Sons Ltd and RADMA; Figure 4.6 from Success and failure of innovation: a review of the literature, International Journal of Innovation Management, 7(3), pp. 309 –38 (van der Panne, G., van Beers, C. and Kleinknecht, A. 2003), World Scientific Publishing Co.; Figure 4.7 from Sectoral patterns of technological change: towards a taxonomy and theory, Research Policy, 13, pp. 343 –73 (Pavitt, K. 1994), Elsevier Science Ltd; Figures 5.1, 5.5 and 5.6 from Operations Management, 4th edn, Pearson Education Ltd (Slack, N. et al. 2004), © Pearson Education Ltd; Figure 5.4 from Why the process industries are different, Production and Inventory Management Journal, 22(4), pp. 9–24 (Taylor, S.G., Stewart, S.M. and Bolander, S.F. 1981), used with permission from APICS, copyright 1981; Figure 5.8 from Lean Product Management, The 280 Group (Cohen, G. 2011), © 2011 The 280 Group, reproduced with permission; Figure 7.4 from Innovation Management: Strategies, Implementation and Profit, Oxford University Press (Afuah, A. 2003) p. 53, Figure 3.5, by permission of Oxford University Press, USA; Figure 7.9 from Patterns of industrial innovation, Technology Review, 80(7), pp. 40 –7 (Abernathy, W.J. and Utterback, J. 1978), © 1978 from MIT Sloan Management Review/Massachusetts Institute of Technology, all rights reserved, distributed by Tribune Content Agency; Figure 7.10 from Organizational determinants of technological change: towards a sociology of technological evaluation, Research in Organizational Behavior, 14, pp. 311–47 (Tushman, M.L. and Rosenkopf, L. 1992), © Elsevier, 1992; Figure 8.2 from Carmaker alliances: a tangled web, Financial Times, 04/05/2010 (Reed, J.), © The Financial Times Limited. All Rights Reserved; Figure 10.7 adapted from Managing Engineering and Technology: An Introduction to Management for Engineers, 2nd edn, Prentice Hall, Inc. (Morse, D. and Babcock, D.L. 1996), © 1996, adapted by permission of Pearson Education, Inc., Upper Saddle River, NJ; Figure 11.3 adapted from Architect or Bee? The Human Price of Technology, Chatto & Windus (Cooley, M. 1987), reprinted by permission of The Random House Group Ltd; Figure 12.4 adapted from Business model innovation: opportunities and barriers, Long Range Planning, 43, pp. 354–63 (Chesbrough, H. 2010), figure 2, p. 360, copyright 2010, with permission from Elsevier; Figure 13.4 from Brand first management, Journal of Marketing Management, 12, pp. 269 – 80 (Rubenstein, H. 1996), Westburn Publishers; Figure 14.4 from How to organise for new products, Harvard Business Review, 35, pp. 49–62 (Johnson, S.C. and Jones, C. 1957), Harvard Business School Publishing; Figure 14.6 adapted from PDMA research on new product development practices: updating trends and benchmarking best practices, Journal of Product Innovation Management, 14(5), pp. 429–58 (Griffin, A. 1997), © John Wiley & Sons Ltd; Figure 14.7 from Brand franchise extension: new product benefits from existing brand names, Business Horizons, vol. 24, no. 2, pp. 36 – 41 (Tauber, E.M. 1981), with permission from Elsevier; Figure 14.8 from Product replacement: strategies for simultaneous product deletion and launch, Journal of Product Innovation Management, vol. 11, no. 5, pp. 433 –50 (Saunders, J. and Jobber, D. 1994), © John Wiley & Sons Ltd; Figure 14.12 from The Design Dimension, Blackwell Publishing Ltd (Lorenz, C. 1990), with permission from John Wiley & Sons Ltd, permission conveyed through Copyright Clearance Center, Inc.; Figure 15.1 from Service Operations Management, 4th edn, Prentice Hall (Johnston, R. and Clark, G. 2012) xxiv Acknowledgements figure 2.2, p. 36, © Pearson Education Ltd; Figure 16.2 adapted from Proceedings of the Annual Conference of the European Marketing Academy, Maastricht (Saren, M.A.J. and Tzokas, N. 1994); Figure 16.3 from Competing for the future, Harvard Business Review, vol. 72, no. 4, pp. 122 – 8 (Hamel, S. and Prahalad, C.K. 1994), Harvard Business School Publishing. Tables Table 1.2 from The most innovative companies, https://www.bcgperspectives.com/ content/interactive/innovation_growth_most_innovative_companies_interactive_ guide/, The Boston Consulting Group; Table 2.1 adapted from Global Shift: Transforming the World Economy, Paul Chapman (Dicken, P. 1998), reproduced by permission of Peter Dicken and SAGE Publications, London, Los Angeles, New Delhi and Singapore, copyright © Sage Publications, 1998; Table 2.2 from Why entrepreneurship has won, Coleman White Paper, pp. 1–8 (Stevenson, H.H. 2000), http://www.unm.edu/~asalazar/Kauffman/Entrep_research/e_won.pdf, Professor Howard H. Stevenson; Table 4.1 from Innovation management measurement: a review, International Journal of Management Reviews, 8(1), pp. 21–  47 (Adams, R., Bessant, J. and Phelps, R. 2006), reproduced with permission of John Wiley & Sons; Table 4.3 from Juggling entrepreneurial style and organizational structure: how to get your act together, Sloan Management Review, Winter, pp. 43–53 (Slevin, D.P. and Covin, J.G. 1990), © 1990 from MIT Sloan Management Review/Massachusetts Institute of Technology, all rights reserved, distributed by Tribune Content Agency; Table 6.2 from Patents: Their Effectiveness and Role, Carnegie Mellon University & National Bureau of Economic Research (Cohen, W.M. 2002), with permission from Wesley Cohen; Table 7.1 from Patterns of industrial innovation, Technology Review, 80(7), pp. 40 –7 (Abernathy, W.J. and Utterback, J. 1978), © 1978 from MIT Sloan Management Review/Massachusetts Institute of Technology, all rights reserved, distributed by Tribune Content Agency; Table 9.1 from Economics of Industrial Research & Innovation, European Commission, http://iri.jrc.ec. europa.eu/research/scoreboard_2015.htm, © European Union, 1995–2016; Table 9.2 from www.innovation.gov.uk/rd_scoreboard, contains public sector information licensed under the Open Government Licence (OGL) v3.0, http://www. nationalarchives.gov.uk/doc/open-government-licence; Table 9.3 from Towards the sixth generation of R&D management, International Journal of Project Management, 22(5), pp. 369–75 (Nobelius, D. 2004), exhibit 1, copyright 2004, with permission from Elsevier; Table 9.4 from EU R&D Scoreboard: The 2014 EU Industrial R&D Investment Scoreboard, European Commission (Hernández, H., Tübke, A., Hervás, F., Vezzani, A., Dosso, M., Amoroso, S. and Grassano, N. 2015), © European Union, 1995–2016; Table 12.3 from Do Some Business Models Perform Better than Others? A Study of the 1000 Largest US Firms, Sloan School of Management, Massachusetts Institute of Technology, Working Paper No. 226 (Weill, P., Malone, T.W., D’Urso, V.T., Herman, G. and Woerner, S. 2005), © 2005 from MIT Sloan Management Review/Massachusetts Institute of Technology, all rights reserved, distributed by Tribune Content Agency; Table 12.5 from Royalty Rates for Licensing Intellectual Property, John Wiley and Sons, Inc. (Parr, R.L. 2007), republished with permission of Wiley, permission conveyed through Copyright Clearance Center, Inc.; Table 13.3 from Product Strategy and Management, Prentice Hall (Baker, M. xxv Acknowledgements and Hart, S. 1989), © Pearson Education Ltd; Table 13.5 with permission from The Nielsen Company; Table 14.1 from The role of marketing specialists in product development, Proceedings of the 21st Annual Conference of the Marketing Education Group, Huddersfield, Vol. 3, pp. 176 –91 (Johne, F.A. and Snelson, P.A. 1988); Table 14.3 from Product development: past research, present findings and future directions, Academy of Management Review, Vol. 20, No. 2, pp. 343 –78 (Brown, S.L. and Eisenhardt, K.M. 1995), Academy of Management; Table 14.6 adapted from Britvic Soft Drinks Review 2015, page 46, http://www.britvic.com/~/media/ Files/B/Britvic-V3/documents/pdf/presentation/2015/brv-300044-eve-soft-drinksreview-2015m.pdf, source: Nielsen Scantrack 52we 27 December 2014, with permission from The Nielsen Company; Table 15.2 adapted from Service Operations Management, 4th ed., Prentice Hall (Johnston, R. and Clark, G. 2012), © Pearson Education Ltd; Table 15.4 from An Analysis of Internet Banking Adoption in Turkey: Consumer, Innovation and Service Developer Dimensions, PhD thesis, University of Portsmouth (Ozdemir, S. 2007). Text Illustration 1.1 adapted from Apple Watch app designers scramble ahead of launch, Financial Times, 06/04/2015 (Bradshaw, T.), © The Financial Times Limited. All Rights Reserved; Illustration 2.1 from Brussels v Google – Antitrust rules – EU poised to launch broader competition crackdown, Financial Times, 16/04/2015 (Oliver, C. and Waters, R.), © The Financial Times Limited. All Rights Reserved; Illustration 4.1 from Business pioneers in technology, Financial Times, 31/03/2015 (Waters, R.), © The Financial Times Limited. All Rights Reserved; Illustration 6.1 from Theft of intellectual property ‘should be a crime’, Financial Times, 24/09/2010 (Greenhalgh, H.), © The Financial Times Limited. All Rights Reserved; Illustration 6.5 from Interview with Adam Hargreaves – Mr Men illustrator and writer, http://www.sussexlife.co.uk/people/celebrity-interviews/ interview_with_adam_hargreaves_mr_men_illustrator_and_writer_1_1636359, Archant Community Media Ltd; Illustration 8.2 adapted from www.corning.com/ innovationventures, Corning Incorporated; Illustration 8.3 from Racing for radical innovation: how motorsport companies harness network diversity for discontinuous innovation (Delbridge, R. and Mariotti, F. 2009), Advanced Institute of Management Research, London; Illustration 8.6 from How to keep your best people happy in the saddle, Financial Times, 25/10/2010 (Moules, J.), © The Financial Times Limited. All Rights Reserved; Illustration 9.3 from EU R&D Scoreboard: The 2014 EU Industrial R&D Investment Scoreboard, European Commission (Hernández, H., Tübke, A., Hervás, F., Vezzani, A., Dosso, M., Amoroso, S. and Grassano, N. 2015), © European Union, 1995–2016; Illustration 10.1 from Quickhit chemistry becomes elusive, Financial Times, 12/09/2001 (Michaels, A.), © The Financial Times Limited. All Rights Reserved; Case study on p. 368 from The rise of DNA analysis in crime solving, The Guardian, 10/04/2010, p. 24 (Jones, T.), copyright Guardian News & Media Ltd 2016; Illustration 11.2 from Cult carmaker Morgan defies the gloom, Financial Times, 22/08/2010 (Moules, J.), © The Financial Times Limited. All Rights Reserved; Illustration 14.1 from New products crucial to success, Financial Times, 21/05/2002 (Marsh, P.), © The Financial Times Limited. All Rights Reserved; Quotes on pp. 509 and 513 from Innocent Drinks, xxvi Acknowledgements www.innocentdrinks.co.uk; Illustration 16.3 from Marketing industry turns to mind reading, Financial Times, 11/04/2010 (Kuchler, H.), © The Financial Times Limited. All Rights Reserved. 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All other images © Pearson Education xxvii This page intentionally left blank Plan of the book Part One Innovation management Chapter 1 Innovation management: an introduction Chapter 2 National systems of innovation and entrepreneurship Chapter 3 Market adoption and technology diffusion Chapter 4 Managing innovation within firms Chapter 5 Operations and process innovation Chapter 6 Managing intellectual property Part Two Turning technology into business Chapter 7 Managing organisational knowledge Chapter 8 Strategic alliances and networks Chapter 10 Managing R&D projects Chapter 9 Management of research and development Chapter 11 Open innovation and technology transfer Part Three New product development Chapter 12 Business models Chapter 13 Product and brand strategy Chapter 14 New product development Chapter 15 New service innovation Chapter 16 Market research and its influence on new product development Chapter 17 Managing the new product development process xxix This page intentionally left blank Part One Innovation management The purpose of this part of the book is to introduce and explore the concept of innovation management. Particular emphasis is placed on the need to view innovation as a management process. A cyclic model of innovation is introduced, which emphasises the importance of internal processes and external linkages. This raises the issue of the context of innovation and Chapter 2 demonstrates that innovation cannot be separated from the wider national system. The United States is often cited as a good example of a system that enables innovation to flourish: hence it is necessary to explore the economic factors that influence innovation and the role of entrepreneurship. The rate at which these technologies are adopted and used by consumers and society is the subject of Chapter 3. Chapter 4 explores the issue of the organisational context and it is from this vantage point that the subject of managing innovation within firms is addressed. Virtually all major technological innovations occur within organisations; hence it is necessary to look at organisations and explore how they manage innovation. Given that many new product ideas are based on existing products and may be developed from within the production or service operations function, Chapter 5 considers the role of operations within innovation. Many new product ideas may be modest and incremental rather than radical but the combined effect of many, small, innovative ideas may be substantial. A major part of the process of innovation is the management of a firm’s intellectual effort and this is the focus of Chapter 6. Patents, trademarks, copyright and registered designs are all discussed. The principal message of this part is this: innovation is a management process that is heavily influenced by the organisational context and the wider macro system in which the organisation exists. Chapter 1 Innovation management: an introduction Introduction Innovation is one of those words that suddenly seems to be all around us. Firms care about their ability to innovate, on which their future allegedly depends (Christensen and Raynor, 2003), and many management consultants are busy persuading companies about how they can help them improve their innovation performance. Politicians care about innovation, too: how to design policies that stimulate innovation has become a hot topic at various levels of government. The European Commission, for instance, has made innovation policy a central element in its attempt to invigorate the European economy (see Chapter 2). A large amount of literature has emerged, particularly in recent years, on various aspects of innovation and many new research units focusing on innovation have been formed (Martin, 2012). There is extensive scope for examining the way innovation is managed within organisations. Most of us are well aware that good technology can help companies achieve competitive advantage and long-term financial success. But there is an abundance of exciting new technology in the world and it is the transformation of this technology into products that is of particular concern to organisations. There are numerous factors to be considered by the organisation, but what are these factors and how do they affect the process of innovation? This book will explain how and why most of the most significant inventions of the past two centuries have not come from flashes of for-profit inspiration, but from communal, multilayered endeavour – one idea being built on another until a breakthrough is reached (Johnson, 2010). The Apple case study at the end of this chapter helps illustrate Apple’s rise and fall over the past 20 years. Chapter contents The importance of innovation The study of innovation Two traditions of innovation studies: Europe and the USA Recent and contemporary studies The need to view innovation in an organisational context Individuals in the innovation process Problems of definition and vocabulary Entrepreneurship Design Innovation and invention Successful and unsuccessful innovations Different types of innovation Technology and science Popular views of innovation Models of innovation Serendipity Linear models Simultaneous coupling model Architectural innovation Interactive model Innovation life cycle and dominant designs Open innovation and the need to share and exchange knowledge (network models) Doing, using and interacting (DUI) mode of innovation Discontinuous innovation – step changes Innovation as a management process A framework for the management of innovation New skills Innovation and new product development Case study: Has the Apple innovation machine stalled? 4 7 9 10 11 12 12 13 13 15 16 17 18 20 21 21 22 23 24 24 25 26 27 28 30 30 33 34 35 Learning objectives When you have completed this chapter you will be able to: ● ● ● ● ● ● ● recognise the importance of innovation; explain the meaning and nature of innovation management; provide an introduction to a management approach to innovation; appreciate the complex nature of the management of innovation within organisations; describe the changing views of innovation over time; recognise the role of key individuals within the process; and recognise the need to view innovation as a management process. 3 Chapter 1 Innovation management: an introduction The importance of innovation Corporations must be able to adapt and evolve if they wish to survive. Businesses operate with the knowledge that their competitors will, inevitably, come to the market with a product that changes the basis of competition. The ability to change and adapt is essential to survival. But can firms manage innovation? The answer is certainly yes, as Bill Gates confirmed in 2008: The share price is not something we control. We control innovation, sales and profits. (Rushe and Waples, 2008) Today, the idea of innovation is widely accepted. It has become part of our culture – so much so that it verges on becoming a cliché. But, even though the term is now embedded in our language, to what extent do we fully understand the concept? Moreover, to what extent is this understanding shared? A scientist’s view of innovation may be very different from that of an accountant in the same organisation. The Apple Inc. story in Illustration 1.1 puts into context the subject of innovation and new product development. In this case, Apple’s launch of a new product in the mobile phone market will help Apple generate increases in revenue and grow the firm. Innovation is at the heart of many companies’ activities. But to what extent is this true of all businesses? And why are some businesses more innovative than others? Illustration 1.1 Apple Watch app designers scramble ahead of launch Source: Neil Fraser/Alamy Images Apple has invited small groups of developers to its Silicon Valley offices to help them prepare their apps for its Watch, as it gears up for the launch at the end of this month. Their creations range from exercise trackers and car-hailing services such as Uber, to a digital version of a painter’s palette board and an app for sending a tweet to astronauts passing overhead on the International Space Station, all from a user’s wrist. In addition to its own messaging and fitness services, Apple is hoping a vibrant App Store will help persuade customers to spend between $350 and $17,000 on the Watch, its first new device since the iPad. Developers say the technical and creative challenge is greater than when they had to rejig their iPhone apps for the iPad five years ago, due to the Watch’s tiny screen and control scheme. Some developers are able to draw on their experience with other smartwatches, such as the 4 ­ ioneering Pebble or Google’s Android Wear. p Many are using much more rudimentary techniques, such as taping paper mock-ups to their arms, to figure out what might work best on the Watch’s 38–42mm screen. Before March’s press event, only top-ranking iPhone developers such as Uber and Facebook were invited to Apple’s offices to test their Watch apps. In the The importance of innovation weeks since then, however, it has opened to more, with about 20 developers a day visiting its labs, according to those who have been there. App makers are betting that Apple will succeed where other smartwatch makers have failed to sell in the many millions. Source: Bradshaw, T. (2015), FT.com. 6 April. © The Financial Times Limited 2015. All Rights Reserved. What is meant by innovation? And can it be managed? These are questions that will be addressed in this book. ‘. . . not to innovate is to die’, wrote Christopher Freeman (1982) in his famous study of the economics of innovation. Certainly, companies that have established themselves as technical and market leaders have shown an ability to develop successful new products. In virtually every industry, from aerospace to pharmaceuticals and from motor cars to computers, the dominant companies have demonstrated an ability to innovate (see Table 1.1). Furthermore, in The Boston Consulting Group’s annual report on the world’s most innovative companies, these same firms are delivering impressive growth and/or return to their shareholders (see Table 1.2). Table 1.1 Market leaders in 2015 Industry Market leaders Innovative new products and services Cell phones Samsung; Apple Design and new features Internet-related industries Google; Facebook New services Pharmaceuticals Pfizer; GlaxoSmithKline Impotence; ulcer treatment drug Motorcars Toyota; BMW Car design and associated product developments Computers and software development Intel; IBM and Microsoft; SAP Computer chip technology, computer hardware improvements and software development Table 1.2 World’s most innovative companies 2014 Rank Company Revenue growth 2012–13 % change R&D spending 2012–13 % change 1 Apple 9.2 32.4 2 Google 19.2 17.1 3 Samsung 17.0 27.8 4 Microsoft 5.6 6.1 5 IBM –4.6 –1.2 6 Amazon 21.9 43.8 7 Tesla Motors 387.2 –15.3 8 Toyota –3.9 –6.9 9 Facebook 54.7 1.1 Sony –5.7 –18.8 10 Source: www.bcgperspectives.com/content/interactive/innovation_growth_most_innovative_companies_ interactive_guide/, The Boston Consulting Group 5 Chapter 1 Innovation management: an introduction Table 1.3 Nineteenth-century economic development fuelled by technological innovations Innovation Innovator Date Steam engine James Watt 1770–80 Iron boat Isambard Kingdom Brunel 1820–45 Locomotive George Stephenson 1829 Electromagnetic induction dynamo Michael Faraday 1830–40 Electric light bulb Thomas Edison and Joseph Swan 1879–90 A brief analysis of economic history, especially in the United Kingdom, will show that industrial technological innovation has led to substantial economic benefits for the innovating company and the innovating country (see Illustration 1.2). Indeed, the industrial revolution of the nineteenth century was fuelled by technological innovations (see Table 1.3). Technological innovations have also been an important component in the progress of human societies. Anyone who has visited the towns of Bath, Leamington and Colchester will be very aware of how the Romans contributed to the advancement of human societies. The introduction over 2,000 years ago of sewers, roads and elementary heating systems is credited to these early invaders of Britain. Illustration 1.2 A review of the history of economic growth Economic historians argue that the world’s economy has experienced unprecedented growth rates only after 1800, following millennial relative stagnation, because of the role of technology in affecting economic change. The classical economists of the eighteenth and nineteenth centuries believed that technological change and capital accumulation were the engines of growth. This belief was based on the conclusion that productivity growth causes population growth, which in turn causes productivity to fall. Today’s theory of population growth is very different from these early attempts at understanding economic growth. It argues that rising incomes slow the population growth because they increase the rate of opportunity cost of having children. Hence, as technology advances, productivity and incomes grow. The Austrian economist, Joseph Schumpeter, was the founder of modern growth theory and is regarded as one of the world’s greatest econo- 6 mists. In the 1930s he was the first to realise that the development and diffusion of new technologies by profit-seeking entrepreneurs formed the source of economic progress. One important insight arising from Schumpeter’s ideas is that innovation can be seen as ‘creative destruction’ waves that restructure the whole market in favour of those who grasp discontinuities faster. In his own words ‘the problem that is usually visualised is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them.’ Robert Solow, who was a student of Schumpeter, advanced his professor’s theories in the 1950s and won the Nobel Prize for economic science. Paul Romer has developed these theories further and is responsible for the modern theory of economic growth, sometimes called neoSchumpeterian economic growth theory, which argues that sustained economic growth arises The study of innovation from competition amongst firms. Firms try to increase their profits by devoting resources to creating new products and developing new ways of making existing products. It is this economic the- ory that underpins most innovation management and new product development theories. Source: Adapted from Parkin, M. et al. (2008) and McCloskey, D.N. (2013). Pause for thought ? Not all firms develop innovative new products, but they still seem to survive. Do they thrive? The study of innovation Innovation has long been argued to be the engine of growth. It is important to note that it can also provide growth, almost regardless of the condition of the larger economy. Innovation has been a topic for discussion and debate for hundreds of years. Nineteenth-century economic historians observed that the acceleration in economic growth was the result of technological progress. However, little effort was directed towards understanding how changes in technology contributed to this growth. Schumpeter (1934, 1939, 1942) was amongst the first economists to emphasise the importance of new products as stimuli to economic growth. He argued that the competition posed by new products was far more important than marginal changes in the prices of existing products. For example, economies are more likely to experience growth due to the development of products, such as new computer software or new pharmaceutical drugs than to reductions in prices of existing products, such as telephones or motorcars. Indeed, early observations suggested that economic development does not occur in any regular manner, but seemed to occur in bursts or waves of activity, thereby indicating the important influence of external factors on economic development. This macro view of innovation as cyclical can be traced back to the mid-nineteenth century. It was Marx who first suggested that innovations could be associated with waves of economic growth. Since then, others such as Schumpeter (1934, 1939), Kondratieff (1935/51) and Abernathy and Utterback (1978) have argued the longwave theory of innovation. Kondratieff was, unfortunately, imprisoned by Stalin for his views on economic growth theories, because they conflicted with those of Marx. Marx suggested that capitalist economies eventually would decline, whereas Kondratieff argued that they would experience waves of growth and decline. Abernathy and Utterback (1978) contended that at the birth of any industrial sector there is radical product innovation, which is then followed by radical innovation in production processes, followed, in turn, by widespread incremental innovation. This view was once popular and seemed to reflect the life cycles of many industries. It has, however, failed to offer any understanding of how to achieve innovative success. After the Second World War, economists began to take an even greater interest in the causes of economic growth (Domar, 1946; Harrod, 1949). One of the most important influences on innovation seemed to be industrial research and development. After all, during the war, military research and development (R&D) had 7 Chapter 1 Innovation management: an introduction produced significant technological advances and innovations, including radar, aerospace and new weapons. A period of rapid growth in expenditure by countries on R&D was to follow, exemplified by US President Kennedy’s 1960 speech outlining his vision of getting a man on the moon before the end of the decade. But economists soon found that there was no direct correlation between R&D spending and national rates of economic growth. It was clear that the linkages were more complex than first thought (this issue is explored more fully in Chapter 9). There was a need to understand how science and technology affected the economic system. The neo-classical economics approach had not offered any explanations. A series of studies of innovation were undertaken in the 1950s, which concentrated on the internal characteristics of the innovation process within the economy. A feature of these studies was that they adopted a cross-discipline approach, incorporating economics, organisational behaviour and business and management. The studies looked at: ● ● ● the generation of new knowledge; the application of this knowledge in the development of products and processes; the commercial exploitation of these products and services in terms of financial income generation. In particular, these studies revealed that firms behaved differently (see Carter and Williams, 1957; Simon, 1957; Woodward, 1965). This led to the development of a new theoretical framework that attempted to understand how firms managed the above, and why some firms appeared to be more successful than others. Later studies in the 1960s were to confirm these initial findings and uncover significant differences in organisational characteristics (Burns and Stalker, 1961; Cyert and March, 1963; Myers and Marquis, 1969). Hence, the new framework placed more emphasis on the firm and its internal activities than had previously been the case. The firm and how it used its resources was now seen as the key influence on innovation. Neo-classical economics is a theory of economic growth that explains how savings, investments and growth respond to population growth and technological change. The rate of technological change influences the rate of economic growth, but economic growth does not influence technological change. Rather, technological change is determined by chance. Thus, population growth and technological change are exogenous. Also, neo-classical economic theory tends to concentrate on industry or economy-wide performance. It tends to ignore differences amongst firms in the same line of business. Any differences are assumed to reflect differences in the market environments that the organisations face. That is, differences are not achieved through choice but reflect differences in the situations in which firms operate. In contrast, research within business management and strategy focuses on these differences and the decisions that have led to them. Furthermore, the activities that take place within the firm that enable one firm seemingly to perform better than another, given the same economic and market conditions, has been the focus of much research effort since the 1960s. The Schumpeterian view sees firms as different – it is the way a firm manages its resources over time and develops capabilities that influences its innovation performance. The varying emphasis placed by different disciplines on explaining how innovation occurs is brought together in the framework in Figure 1.1. This overview of the innovation process includes an economic perspective, a business 8 The study of innovation Scientific and technological developments inevitably lead to knowledge inputs Creative individuals Firms’ operating functions and activities Firms develop knowledge, processes and products Firms’ architecture and external linkages Societal changes and market needs lead to demands and opportunities Figure 1.1 Overview of the innovation process management strategy perspective and organisational behaviour, which attempts to look at the internal activities. It also recognises that firms form relationships with other firms and trade, compete and cooperate with each other. It further recognises that the activities of individuals within the firm also affect the process of innovation. Each firm’s unique organisational architecture represents the way it has constructed itself over time. This comprises its internal design, including its functions and the relationships it has built up with suppliers, competitors, customers, etc. This framework recognises that these will have a considerable impact on a firm’s innovative performance. So, too, will the way it manages its individual functions and its employees or individuals. These are separately identified within the framework as being influential in the innovation process. Two traditions of innovation studies: Europe and the USA Benoit Godin has written extensively on the intellectual history of innovation. His work provides a detailed account of the development of the category of innovation. In his two papers ‘Innovation Studies: The development of a speciality I and II’ (Godin, 2010a; 2010b) he explains how two traditions emerged. The first in the USA was concerned with technological change as the use of inventions in industrial production and the second in Europe, which was concerned more specifically with commercialised invention. The European tradition, which was developed as late as the 1970s, restricted the previously broader definition of innovation as the introduction of change to a narrower focus on technology and commercialisation. Christopher Freeman is largely credited as responsible for this so-called European tradition, which shifted the focus of studies of innovation to the process from invention to diffusion and the consideration of policy issues, specifically economic growth. The idea of a professionalised R&D system was proposed as having a key role. 9 Chapter 1 Innovation management: an introduction According to Godin, this is now the position adopted by many public organisations, including the OECD. Godin argues that Freeman transformed an old meaning of technological innovation; that of introducing technical change within firms to commercialising technological invention and so helped build a new tradition. The European tradition saw invention as part of the innovation process and introduced the function of market uncertainty. This begins to shift the focus to product development and the role of users in the testing of such products. In addition, Godin identified another rationale that Freeman put forward for wanting to include users of the technology. This was: ‘Freeman believed that there is a failure in the market mechanism in relation to technical change in consumer goods and services’ (Godin, 2010b: 26). Godin concludes by suggesting, somewhat mischievously, that the two different traditions have emerged on different continents and continue to exist in almost total ignorance of each other. This helps to explain the emergence of different views on how to delineate innovation. Recent and contemporary studies As the twentieth century drew to a close, there was probably as much debate and argument concerning innovation and what contributes to innovative performance as a hundred years ago. This debate has, nonetheless, progressed our understanding of the area of innovation management. It was Schumpeter who argued that modern firms equipped with R&D laboratories have become the central innovative actors. Since his work, others have contributed to the debate (Chandler, 1962; Cohen and Levinthal, 1990; Nelson and Winter, 1982; Patel and Pavitt, 2000; Pavitt, 1990; Prahalad and Hamel, 1990). This emerging Schumpeterian or evolutionary theory of dynamic firm capabilities is having a significant impact on the study of business and management today. Success in the future, as in the past, surely will lie in the ability to acquire and utilise knowledge and apply this to the development of new products. Uncovering how to do this remains one of today’s most pressing management problems. The importance of uncovering and satisfying the needs of customers is the important role played by marketing and these activities feed into the new product development process. Studies by Christensen (2003) and Hamel and Prahalad (1994) suggest that listening to your customer may actually stifle technological innovation and be detrimental to long-term business success. Ironically, to be successful in industries characterised by technological change, firms may be required to pursue innovations that are not demanded by their current customers. Christensen (2003) distinguishes between ‘disruptive innovations’ and ‘sustaining innovations’ (radical or incremental innovations). Sustaining innovations appealed to existing customers, since they provided improvements to established products. For example, the introduction of new computer software usually provides improvements for existing customers in terms of added features. Disruptive innovations tend to provide improvements greater than those demanded. For example, whilst the introduction of 3.5-inch disk drives to replace 5.25-inch drives provided an enormous improvement in performance, it also created problems for users who were familiar with the previous format. These disruptive innovations also tended to create new markets, which eventually captured the existing market (see Discontinuous innovations, later in this chapter for more on this). 10 The need to view innovation in an organisational context The need to view innovation in an organisational context During the early part of the nineteenth century, manufacturing firms were largely family oriented and concentrated their resources on one activity. For example, one firm would produce steel from iron ore, another would roll this into sheet steel for use by, say, a manufacturer of cooking utensils. These would then be delivered to shops for sale. Towards the latter part of the century, these small enterprises were gradually replaced by large firms that would perform a much wider variety of activities. The expansion in manufacturing activities was simultaneously matched by an expansion in administrative activities. This represented the beginnings of the development of the diversified functional enterprise. The world expansion in trade during the early part of the twentieth century saw the quest for new markets by developing a wide range of new products (Chandler, 1962). Unfortunately, many of the studies of innovation have treated it as an artefact that is somehow detached from knowledge and skills and not embedded in knowhow. This, inevitably, leads to a simplified understanding, if not a misunderstanding, of what constitutes innovation. This section shows why innovation needs to be viewed in the context of organisations and as a process within organisations. The diagram in Figure 1.1 shows how a number of different disciplines contribute to our understanding of the innovation process. It is important to note that firms do not operate in a vacuum. They trade with each other, they work together in some areas and compete in others. Hence, the role of other firms is a major factor in understanding innovation. As discussed earlier, economics clearly has an important role to play. So, too, does organisational behaviour as we try to understand what activities are necessary to ensure success. Studies of management will also make a significant contribution to specific areas, such as marketing, R&D, manufacturing operations and competition. As has been suggested, in previous centuries it was easier in many ways to mobilise the resources necessary to develop and commercialise a product, largely because the resources required were, in comparison, minimal. Today, however, the resources required, in terms of knowledge, skills, money and market experience, mean that significant innovations are synonymous with organisations. Indeed, it is worthy of note that more recent innovations and scientific developments, such as significant discoveries like mobile phones or computer software and hardware developments, are associated with organisations rather than individuals (see Table 1.4). Moreover, the increasing depth of our understanding of science inhibits the breadth of scientific study. In the early part of the twentieth century, for example, the German chemical company Bayer was regarded as a world leader in chemistry. Now it is almost impossible for single chemical companies to be scientific leaders in all areas of chemistry. The large companies have specialised in particular areas. This is true of many other industries. Even university departments are having to concentrate their resources on particular areas of science. They are no longer able to offer teaching and research in all fields. In addition, the creation, development and commercial success of new ideas require a great deal of input from a variety of specialist sources and often vast amounts of money. Hence, today’s innovations are associated with groups of people or companies. Innovation is, invariably, a team game. This will be explored more fully in Chapters 4, 7 and 16. 11 Chapter 1 Innovation management: an introduction Table 1.4 Twentieth-century technological innovations Date New product Responsible organisation 1930s Polythene ICI 1945 Ballpoint pen Reynolds International Pen Company 1950s Manufacturing process: float glass Pilkington 1970/80s Ulcer treatment drug: Zantac GlaxoSmithKline 1970/80s Photocopying Xerox 1980s Personal computer Apple Computer 1980/90s Computer operating system: Windows 95 Microsoft 1995 Impotence drug: Viagra Pfizer 2000s Cell phones Motorola/Nokia 2005 MP3 players Creative; Apple Pause for thought ? If two different firms, similar in size, operating in the same industry, spend the same on R&D, will their level of innovation be the same? Individuals in the innovation process Figure 1.1 identifies individuals as a key component of the innovation process. Within organisations, it is individuals who define problems, have ideas and perform creative linkages and associations that lead to inventions. Moreover, within organisations, it is individuals in the role of managers who decide what activities should be undertaken, the amount of resources to be deployed and how they should be carried out. This has led to the development of so-called key individuals in the innovation process, such as inventor, entrepreneur, business sponsor, etc. These are discussed in detail in Chapter 4. Problems of definition and vocabulary Whilst there are many arguments and debates in virtually all fields of management, it seems that this is particularly the case in innovation management. Very often, these centre on semantics. This is especially so when innovation is viewed as a single event. When viewed as a process, however, the differences are less substantive. At the heart of this book is the thesis that innovation needs to be viewed as a process. If one accepts that inventions are new discoveries, new ways of doing things, and that products are the eventual outputs from the inventions, that process from new discovery to eventual product is the innovation process. A useful analogy would be education, where qualifications are the formal outputs of the education process. Education, like innovation, is not and cannot be viewed as an event (Linton, 2009). Arguments become stale when we attempt to define terms such as new, creativity or discovery. Often, it results in a game of semantics. First, what is new to one company may be old hat to another. Second, how does one judge success in terms of 12 Problems of definition and vocabulary commercial gain or scientific achievement? Are they both not valid and justified goals in themselves? Third, it is context dependent – what is viewed as a success today may be viewed as a failure in the future. We need to try to understand how to encourage innovation in order that we may help to develop more successful new products (this point is explored in Chapters 13 and 14). Entrepreneurship Entrepreneurship is discussed at length in Chapter 2. The popular and traditional view of entrepreneurship is that of an individual who spots an opportunity and develops a business; it is understood that entrepreneurs often seem to have innate talents. In the United States, the subject of innovation management is often covered within ‘entrepreneurship’. Indeed, it has been taught for many years and there are many courses available for students in US business schools on this topic. In a study of past and future research on the subject of entrepreneurship, Howard Stevenson, who did so much to establish entrepreneurship as a discipline at Harvard Business School and was Director of the Arthur Rock Centre for entrepreneurship there, defines entrepreneurship as: the pursuit of opportunity beyond the resources you currently control. (Stevenson and Amabile, 1999) It is the analysis of the role of the individual entrepreneur that distinguishes the study of entrepreneurship from that of innovation management. Furthermore, it is starting small businesses and growing them into large and successful businesses that was the traditional focus of attention of those studying entrepreneurship. This has been changing over the past 10 years, especially across Europe, where there is now considerable emphasis, especially within the technical universities, on trying to understand how entrepreneurship and innovation can help create the new technology intensive businesses of tomorrow. Moreover, it is the recognition of the entrepreneur’s desire to change things that is so important within innovation. We will see later that the role of an entrepreneur is central to innovation management. Illustration 1.3 shows how a serial entrepreneur has driven innovation and new product development in several industries. Design The definition of design with regard to business seems to be widening ever further and encompassing almost all aspects of business (see the Design Council, www.designcouncil.org.uk). For many people design is about developing or creating something; hence we are into semantics regarding how this differs from innovation. Hargadon and Douglas (2001: 476) suggest design is concerned with the emergent arrangement of concrete details that embody a new idea. A key question, however, is how design relates to research and development. Indeed, it seems that, in most cases, the word design and the word development mean the same thing. Traditionally, design referred to the development of drawings, plans and sketches. Indeed, most dictionary definitions continue with this view today and refer to a designer as a ‘draughtsman who makes plans for manufacturers or prepares drawings for clothing or stage productions’ (Oxford English Dictionary, 2005). In the aerospace industry, 13 Chapter 1 Innovation management: an introduction Illustration 1.3 PayPal entrepreneur nets $1.3 billion in sale to eBay Elon Musk (born 28 June 1971) is a South African-American engineer, entrepreneur and philanthropist. He is best known for co-founding PayPal. He is currently the CEO and Product Architect of Tesla Motors, and has degrees in business and physics from the University of Pennsylvania. In March 1999, Musk co-founded X.com, an online financial services and email payment company. One year later, X.com merged with Confinity, originally a company formed to transfer money between Palm Pilots. The new combined entity focused on email payments through the PayPal domain, acquired as part of Confinity. In February 2001, X.com changed its legal name to PayPal. In October 2002, PayPal was acquired by eBay for US$1.5 billion in stock. In 2015 eBay separated from PayPal. Musk decided to invest some of his fortune in Tesla Motors, of which he is a co-founder, chairman of the board and the sole product architect. First investing in April 2004, he led several rounds of financing, and became CEO in October 2008. Tesla Motors built an electric sports car, the Tesla Roadster, and plans to produce a more economical four-door electric vehicle. Musk is responsible for a business strategy that aims to deliver affordable electric vehicles to mass-market consumers. engineers and designers previously would have worked closely together for many years, developing drawings for an aircraft. Today, the process is dominated by computer software programs that facilitate all aspects of the activity; hence the product development activities and the environments in which design occurs have changed considerably. Figure 1.2 shows, along the horizontal axis, the wide spectrum of activities Engineering Product Fashion Mechanical Electronics Chemical Manufacturing Industrial design Outward appearance Human factors Required quality Market/societal changes Style Consumer expectations Research, knowledge and experience built up over time will enable the organisation to inform the three areas below Engineering solutions Form concepts Design trends Functional design Cost effectiveness Manufacturing Considerations Form Colours Graphics Packaging Ergonomics Fashion Styling Emotions Packaging Knowledge inputs leading to product developments Knowledge inputs leading to product developments The spectrum of design activities Product development Figure 1.2 The interaction between development activities and design environment 14 Problems of definition and vocabulary that design encompasses from clothing design to design within electronics. The vertical axis shows how the areas of design feed into outputs from choice of colour to cost effectiveness; all of which are considered in the development of a product. The position taken by this book is to view design as an applied activity within research and development, and to recognise that, in certain industries, like clothing for example, design is the main component in product development. In other industries, however, such as pharmaceuticals, design forms only a small part of the product development activity (Moultrie and Livesey, 2014). Innovation and invention Many people confuse these terms. Indeed, if you were to ask people for an explanation, you would collect a diverse range of definitions. It is true that innovation is the first cousin of invention, but they are not identical twins that can be interchanged. Hence, it is important to establish clear meanings for them. Innovation itself is a very broad concept that can be understood in a variety of ways. One of the more comprehensive definitions is offered by Myers and Marquis (1969): Innovation is not a single action but a total process of interrelated sub processes. It is not just the conception of a new idea, nor the invention of a new device, nor the development of a new market. The process is all these things acting in an integrated fashion. It is important to clarify the use of the term ‘new’ in the context of innovation. Rogers and Shoemaker (1972) do this eloquently: It matters little, as far as human behaviour is concerned, whether or not an idea is ‘objectively’ new as measured by the lapse of time since its first use or discovery . . . If the idea seems new and different to the individual, it is an innovation. [emphasis added] Most writers, including those above, distinguish innovation from invention by suggesting that innovation is concerned with the commercial and practical application of ideas or inventions. Invention, then, is the conception of the idea, whereas innovation is the subsequent translation of the invention into the economy. The following simple equation helps to show the relationship between the two terms: Innovation = theoretical conception + technical invention + commercial exploitation However, all the terms in this equation will need explanation in order to avoid confusion. The conception of new ideas is the starting point for innovation. A new idea by itself, whilst interesting, is neither an invention nor an innovation; it is merely a concept, a thought or collection of thoughts. The process of converting intellectual thoughts into a tangible new artefact (usually a product or process) is an invention. This is where science and technology usually play a significant role. At this stage, inventions need to be combined with hard work by many different people to convert them into products that will improve company performance. These later activities represent exploitation. However, it is the complete process that represents innovation. This introduces the notion that innovation is a process with a number of distinctive features that have to be managed. This is the view taken by this book. To summarise, then, innovation depends on inventions, but inventions need to be 15 Chapter 1 Innovation management: an introduction Illustration 1.4 An example of an invention Scientists and development engineers at a household cleaning products company had been working for many months on developing a new lavatory cleaning product. They had developed a liquid that, when sprayed into the toilet pan, on contact with water, would fizz and sparkle. The effect was to give the impression of a tough, active cleaning product. The company applied for a patent and further developments and market research were planned. However, initial results, both from technical and market specialists, led to the abandonment of the project. The preliminary market feedback suggested a fear of such a product on the part of consumers. This was because the fizz and sparkle looked too dramatic and frightening. Furthermore, additional technical research revealed a short shelf-life for the mixture. This is a clear example of an invention that did not progress beyond the organisation to a commercial product. ­ arnessed to commercial activities before they can contribute to the growth of an h organisation. Thus: Innovation is the management of all the activities involved in the process of idea generation, technology development, manufacturing and marketing of a new (or improved) product or manufacturing process or equipment. This definition of innovation as a management process also offers a distinction between an innovation and a product, the latter being the output of innovation. Illustration 1.4 should help to clarify the differences. It is necessary at this point to cross-reference these discussions with the practical realities of managing a business today. The senior vice-president for research and development at 3M, one of the most highly respected and innovative organisations, recently defined innovation as: Creativity: the thinking of novel and appropriate ideas. Innovation: the successful implementation of those ideas within an organisation. Successful and unsuccessful innovations There is often a great deal of confusion surrounding innovations that are not commercially successful. Some famous examples would be the Kodak Disc Camera or the Sinclair C5. The C5 was a small, electrically driven tricycle or car. Unfortunately for Clive Sinclair, the individual behind the development of the product, it was not commercially successful. Commercial failure, however, does not relegate an innovation to an invention. Using the definition established above, the fact that the product progressed from the drawing board into the marketplace makes it an innovation – albeit an unsuccessful one. Pause for thought ? Android and Apple are the clear dominant market leaders in App platforms. Microsoft has experience of how to be dominant in an industry. Could it possibly be a third App platform? 16 Problems of definition and vocabulary Different types of innovation Industrial innovation includes not only major (radical) innovations but also minor (incremental) technological advances. Indeed, the definition offered above suggests that successful commercialisation of the innovation may involve considerably wider organisational changes. For example, the introduction of a radical, technological innovation, such as digital cameras by Kodak and Fuji, invariably results in substantial internal organisational changes. In this case, substantial changes occurred with the manufacturing, marketing and sales functions. Both of these firms decided to concentrate on the rapidly developing digital photography market. Yet both Fuji and Kodak were the market leaders in supplying traditional 35mm film cartridges. Their market share of the actual camera market was less significant. Such strategic decisions forced changes on all areas of the business. For example, in Kodak’s case, the manufacturing function underwent substantial changes as it began to substantially cut production of 35mm film cartridges. Opportunities existed for manufacturing in producing digital cameras and their associated equipment. Similarly, the marketing function had to employ extra sales staff to educate and reassure retail outlets that the new technology would not cannibalise their film-processing business. Whilst many people would begin to print photographs from their PCs at home, many others would continue to want their digital camera film processed into physical photographs. For both Fuji and Kodak, the new technology has completely changed the photographic industry. Both firms have seen their revenues fall from film cartridge sales, but Kodak and Fuji are now market leaders in digital cameras, whereas before they were not. Hence, technological innovation can be accompanied by additional managerial and organisational changes, often referred to as innovations. This presents a far more blurred picture and begins to widen the definition of innovation to include virtually any organisational or managerial change. Table 1.5 shows a typology of innovations. Innovation was defined earlier in this section as the application of knowledge. It is this notion that lies at the heart of all types of innovation, be they product, process or Table 1.5 A typology of innovations Type of innovation Example Product innovation The development of a new or improved product Process innovation The development of a new manufacturing process such as Pilkington’s float glass process Organisational innovation A new venture division; a new internal communication system; introduction of a new accounting procedure Management innovation TQM (total quality management) systems; BPR (business process re-engineering); introduction of SAPR3* Production innovation Quality circles; just-in-time (JIT) manufacturing system; new production planning software, e.g. MRP II; new inspection system Commercial/marketing innovation New financing arrangements; new sales approach, e.g. direct marketing Service innovation Internet-based financial services *Note: SAP is a German software firm and R3 is an enterprise resource planning (ERP) product. 17 Chapter 1 Innovation management: an introduction service. It is also worthy of note that many studies have suggested that product innovations are soon followed by process innovations in what they describe as an industry innovation cycle (see Chapter 6). Furthermore, it is common to associate innovation with physical change, but many changes introduced within organisations involve very little physical change. Rather, it is the activities performed by individuals that change. A good example of this is the adoption of so-called Japanese management techniques by automobile manufacturers in Europe and the United States. It is necessary to stress at the outset that this book concentrates on the management of product innovation. This does not imply that the list of innovations above are less significant; this focus has been chosen to ensure clarity and to facilitate the study of innovation. Technology and science We also need to consider the role played by science and technology in innovation. The continual fascination with science and technology at the end of the nineteenth century and subsequent growth in university teaching and research have led to the development of many new strands of science. The proliferation of scientific journals over the past 30 years demonstrates the rapidly evolving nature of science and technology. The scientific literature seems to double in quantity every five years (Rothwell and Zegveld, 1985). Science can be defined as systematic and formulated knowledge. There are clearly significant differences between science and technology. Technology is often seen as being the application of science and has been defined in many ways (Lefever, 1992). It is important to remember that technology is not an accident of nature. It is the product of deliberate action by human beings. The following definition is suggested: Technology is knowledge applied to products or production processes. No definition is perfect and the above is no exception. It does, however, provide a good starting point from which to view technology with respect to innovation. It is important to note that technology, like education, cannot be purchased off the shelf like a can of tomatoes. It is embedded in knowledge and skills. In a lecture given to the Royal Society in 1992, the former chairman of Sony, Akio Morita, suggested that, unlike engineers, scientists are held in high esteem. This, he suggested, is because science provides us with information that was previously unknown. Yet, technology comes from employing and manipulating science into concepts, processes and devices. These, in turn, can be used to make our life or work more efficient, convenient and powerful. Hence, it is technology, as an outgrowth of science, that fuels the industrial engine. And it is engineers and not scientists who make technology happen. In Japan, he argued, you will notice that almost every major manufacturer is run by an engineer or technologist. However, in the United Kingdom, some manufacturing companies are led by chief executive officers (CEOs) who do not understand the technology that goes into their own products. Indeed, many UK corporations are headed by chartered accountants. With the greatest respect to accountants, their central concerns are statistics and figures of past performance. How can an accountant reach out and grab the future if he or she is always looking at last quarter’s results (Morita, 1992)? 18 Problems of definition and vocabulary The above represents the personal views of an influential senior figure within industry. There are many leading industrialists, economists and politicians who would concur (Hutton, 1995). But there are equally many who would profoundly disagree. The debate on improving economic innovative performance is one of the most important in the field of political economics. This debate should also include ‘The young world rising’ (see Illustration 1.5). Innovation in action A $900 shop Looking to build a new office or shop? How about adopting the ultimate in recycling – a building made out of stacked shipping containers? It is generally too expensive to ship an em...
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